Pending Home Sales Jump to the Highest Level in 9 Years

Housing Market Shows More Strength but Low Inventory Looms Large

The up-again, down-again housing market received another piece of good news recently. Following mixed data on the sales of existing homes and new homes, the National Association of Realtors (NAR) reported that pending home sales hit the highest monthly rate since May 2006. Pending home sales refer to signed contracts that typically require another month or two to register as completed sales, so it is fair to call this news an indicator of stronger home sales in May and June.

The pending home sales index (seasonally adjusted) rose 3.4% to a value of 112.4 in April, prompting Ron Peltier, CEO of HomeServices of America, to say, "The confidence has returned to housing, not only as shelter but as a good long-term investment." Peltier's argument is bolstered by the fact that pending sales on homes have risen for the past four months in a row — one of the few housing indicators to show a consistent trend lately.

The report does strengthen the argument that the current market is an opportune time to buy a home — if you can find one. Low inventory is the current problem. A six-month inventory of homes on the market is considered the benchmark for a healthy housing market, but in April, the inventory of existing homes for sale stood at 5.3 months. New home inventory was even lower at 4.8 months.

Construction of new homes is picking up after a brutal winter, but not at a suitable pace to resupply the market. Presumably upgrades make up a fair share of the pending home sales, thus the supply of existing homes on the market should increase.

In the meantime, the low inventory and stronger demand brought on by an improving economy have sent home prices further upward. Home prices had already risen 5.7% in 2014, and existing home prices over the last twelve months rose almost 9% to a median of $219,400. Any pricing measure you want to use over the last twelve months shows rising prices, according to Forbes. All the Case-Shiller indices have risen between 4% and 5%, and many major metropolitan markets are very tight on supply.

If the supply does not increase enough to moderate prices soon, first-time homebuyers will start to be priced out of the market, even with improved job numbers and rising wages. Interest rates on thirty-year fixed mortgages have begun to rise from their near historic lows and are hovering around 4%, putting potential homebuyers in a difficult position. Do they settle for a lesser home than they wanted in order to get low interest rates before they rise, or gamble that the supply will increase before interest rates rise or they are priced even further out of the market?

It is not a trivial decision. According to a recent analysis from Realtor.com, waiting for a full year to buy a home costs $18,672 in potential benefits for the average homebuyer across the nation (assuming a thirty-year fixed mortgage).

While it is already a seller's market, things have the potential to get worse before they get better for potential homebuyers. If you are looking for a home now but cannot find one that you like, you may want to consider widening your search or scaling back a bit on your wish list. Stick to your guns if you are absolutely sure of what you want — but be prepared to pay more for the home when you find it, and probably at a higher mortgage interest rate.